Changes to tax laws – What Trustees Need to Know
Most trustees, especially trustees of income-earning trusts, will be aware by now that the trustee tax rate increased on 1 April 2024 to 39% for trusts that, generally speaking, earn and retain more than $10,000 of income each year.
While a significant uptick in transactions occurred in the first quarter of this year (with companies owned by trusts especially taking the opportunity to declare extra or increased dividends to clear out retained earnings balances prior to 1 April), we have seen less tax driven (directly or indirectly) trust transactions of late.
Prudent trustees will usually take matters such as tax into overall consideration as a matter of course when making investment decisions, even where they are not actively required to do so under the terms of the trust.
Inland Revenue guidance has confirmed that trustees who take tax into account when making investment decisions will not necessarily fall foul of Inland Revenue. Nor will trust restructures be viewed as tax avoidance by default if they result in tax being paid on trust income at lower rates than 39%. Trust restructures such as the transfer of income-earning assets into a company structure, or the investment of trust funds into PIEs (portfolio investment entities) (which have a maximum tax rate of 28%) are therefore likely to be permissible if they are undertaken for genuine commercial reasons and do not involve structures or transactions that are artificial or contrived.
Key Takeaways for Trustees
- The trustee tax rate is now 39% for trusts earning and retaining over $10,000 annually.
- Prudent trustees will consider tax implications in their investment decisions, even if not required by the trust’s terms.
- Trustees can evaluate the impact of the tax rate increase on their investment strategies and consider potential restructures.
With the end of the year fast approaching now may be a good time for trustees considering trust restructures for non-tax rate-related reasons (such as increased costs of running multiple trusts and companies) to consider the impact that the tax rate increase might have both in the short and long term on their investment strategies and objectives.
If you have any questions or need assistance with a trust restructure, get in touch with our trust law team.
Special thanks to Special Counsel Jo Giboney for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
